In Thunder Patch II, LLC v. JPMorgan Chase Bank, N.A., plaintiffs filed suit against a trustee in state court seeking a declaration regarding the enforceability of a mineral lease, and the trustee removed the case to federal court based on diversity of citizenship. No. 5-18-CV-00629-OLG-RBF, 2018 U.S. Dist. LEXIS 207696 (W.D. Tex. December 10, 2018). The plaintiff filed a motion to remand and argued that there was not complete diversity because the defendant trustee should also have the citizenship of the states where the trust’s beneficiaries reside.
The court held that when a trustee is sued in its capacity as a trustee, it is the citizenship of the trustee—not the trust’s beneficiaries—that matters for diversity of citizenship purposes. “This rule governs so long as the trustee has ‘real and substantial control’ over the trust’s assets.” Id. The court held that the trustee had control over the assets and cited to trust provisions that granted that power:
Here, Plaintiffs sued JPMorgan as the trustee for the Red Crest Trust; the Red Crest Trust is not a named defendant. Indeed, according to Thunder Patch and HOC, Texas law required them to file suit in this exact manner. Accordingly, the rule from Navarro controls here, as the Fifth Circuit has explained. It is apparent from the record and pleadings that JPMorgan has sufficiently real and substantial control over the trust’s assets, and it therefore is the entity that matters for purposes of diversity jurisdiction.
….
Because JPMorgan is the party with real and substantial control over the trust’s assets, it is JPMorgan’s citizenship that matters here. The Amended Notice of Removal sufficiently alleges complete diversity in good faith based on information and belief.
Id. The court denied the motion to remand and also denied the plaintiffs’ motion for leave to amend their complaint to add a non-diverse defendant.
Interesting Note: Due to a national bank’s ability to remove a case to federal court for diversity of citizenship jurisdiction, many plaintiffs are adding bank employees as defendants to defeat complete diversity and diversity jurisdiction. The bank then has the uphill battle to prove that the employee was fraudulently joined. This jurisdictional fight means that more bank employees will be joined in litigation where they formerly were not.
For example, in Medve v. JPMorgan Chase Bank, N.A., a plaintiff sued a bank and three of its employees for breaches of fiduciary duties arising from fiduciary accounts. No. H-15-2277, 2016 U.S. Dist. LEXIS 11961 (S.D. Tex. February 2, 2016). The bank removed the case to federal court based on diversity jurisdiction: the plaintiff was a Texas resident and the bank was a resident of Ohio. The plaintiff filed a motion for remand, asserting that there was not complete diversity as he had sued three of the bank’s employees, who also lived in Texas, as defendants. The bank asserted that the employees were fraudulently joined, and therefore, did not count for diversity purposes. The district court reviewed whether the plaintiff pled a reasonable basis for recovery as against the bank’s employees. The bank argued that “there is no basis in the law for finding that an employee of a trustee is directly liable for breach of trust.” However, the court agreed with the plaintiff that there are three separate legal bases under Texas law for imposing liability on an employee who carries out the fiduciary functions of an entity: “(1) first, the employee owes a fiduciary duty directly as a subagent carrying out the employer’s fiduciary functions, (2) second, the employee is liable if he ‘participates’ in the employer’s breach of fiduciary duty, which the employee necessarily does if he is the one carrying out the breaches, and (3) third, the employee is personally liable for any tort he commits in the course of his employment, and breach of fiduciary duty is of course a tort.” Id. The court granted the motion to remand, finding it did not have diversity jurisdiction.
